26–21
52.
Jericho Corporation is considering the purchase of new equipment costing initially $96,000.
The equipment has an estimated life of 6 years with no salvage value. Straight-line
depreciation is to be used. Net annual after tax cash flow is estimated to be $31,200 for 6
years. The payback period is:
Lazar Corporation is evaluating a proposal to invest in a machine costing $89,000. The
machine has an estimated useful life of ten years, and an estimated salvage value of
$14,000. The machine will increase the company’s net income by approximately $9,600 per
year. All revenue and expenses other than depreciation will be received and paid in cash.
53.
Refer to the information above. The payback period of the machine is approximately:
54.
Refer to the information above. The expected rate of return on average investment of the
machine is:
Newport Corporation is considering investing $65,000 in equipment to produce a new
product. The useful service life of the equipment is estimated to be ten years, with no
salvage value. Straight-line depreciation is used. The company estimates that production
and sale of the new product will increase net income by $6,500 per year.
55.
Refer to the information above. The payback period of this investment is:
56.
Refer to the information above. The expected rate of return on average investment in this
equipment is:
Neville Company is considering an investment of $380,000 in heavy equipment which will
enable the company to be more competitive in the construction industry. The useful service
life of the equipment is estimated to be 10 years, with $30,000 salvage value. Straight-line
depreciation is used. The company estimates that net income will increase by $41,000 per
year as a result of the company’s ability to handle a wider range of projects with the new
equipment.
57.
Refer to the information above. The payback period for this investment is approximately:
58.
Refer to the information above. The expected rate of return on average investment will be
approximately:
59.
The president of Nash Company is considering a proposal by the factory manager for the
purchase of a machine for $72,500. The useful life would be eight years, with no residual
scrap value. The use of the machine will produce a positive annual cash flow of $14,000 a
year for eight years. An annuity table shows that the present value of $1 received annually
for eight years and discounted at 10% is 5.335. The net present value of the proposal,
discounted at 10%, is:
60.
The management of Salem Corporation is considering the purchase of equipment costing
$109,000 which has an estimated life of 3 years and no salvage value. The net after tax
cash flow from the project for each of the three years is expected to be $45,000. The
company’s cost of capital is 10%. Compute the net present value of the equipment.
(Present value of $1 due in three years, discounted at 10%, is 0.751; present value of $1
received annually for three years, discounted at 10%, is 2.487.)
Newman Labs is considering buying equipment which would enable the company to obtain
a five-year research contract. The specialized equipment costs $650,000 and will have no
salvage value when the five-year contract period is over. The estimated annual operating
results of the project are as follows:
All revenue from the contract and all expenses (except depreciation) will be received or
paid in cash in the same period as recognized for accounting purposes.
61.
Refer to the information above. The payback period for the investment in equipment is
closest to:
62.
Refer to the information above. The return on average investment for this investment is
approximately:
63.
Refer to the information above. Compute the net present value of this investment, using a
discount rate of 12%. (An annuity table shows that the present value of $1 received
annually for five years, discounted at 12%, is 3.605.)
Helicopter Gear is planning to expand its product line, which requires investment of
$475,200 in special-purpose machinery. The machinery has a useful life of six years and no
salvage value. The estimated annual results of offering the new products are as follows:
All revenue from the new products and all expenses (except depreciation) will be received
or paid in cash in the same period as recognized for accounting purposes.
64.
Refer to the information above. The payback period for this proposed investment is:
65.
Refer to the information above. The return on average investment for this proposed
investment is closest to:
66.
Refer to the information above. Compute the net present value of this proposed
investment, using a discount rate of 12%. (An annuity table shows that the present value of
$1 received annually for six years, discounted at 12%, is 4.111.)
Rooney, Inc. is considering the purchase of a new machine costing $640,000. The
machine’s useful life is expected to be 8 years with no salvage value. The straight-line
depreciation method will be used. The net increase in annual after tax cash flow is
expected to be $147,000. Rooney estimates its cost of capital to be 14%. (The present
value of a $1 annuity for 8 years at 14% is 4.639, and the present value of $1 to be received
in 8 years is 0.351.)
67.
Refer to the information above. The net present value of the investment in the machine
under consideration is:
68.
Refer to the information above. Upper level managers at Rooney, Inc. are concerned that
employee estimates of future cash flows from the new machine may be overly optimistic.
To what dollar amount can the annual after tax cash flow fall before the investment in the
new machine should be rejected?
69.
The minimum rate of return used by an investor to bring future cash flows to their present
value is called:
70.
To compute a future amount from a present value, we need to know:
71.
An investment cost $80,000 with no salvage value, a 5 year useful life, and had an expected
annual increase in net income of $7,000. Straight line depreciation is used. What is the
expected return on average investment?
72.
A machine cost $46,000 and had a useful life of 4 years and a residual value of $7,000.
What is the net present value of the machine if the annual cash flow is $16,000 and the
company uses a discount rate of 10%? An annuity table shows the present value of $1 at
10% for 4 years to be 0.683. The present value of an ordinary annuity of $1 discounted at
10% for 4 years is 3.170.
73.
In computing the return on average investment of a particular asset, the asset’s annual
depreciation expense may be viewed as:
74.
The average carrying value (or average investment) of an asset with no salvage value is
equal to:
75.
Joseph Company is considering replacing an existing piece of machinery with newer
technology. In deciding whether to replace the existing machinery, management should
consider which costs as relevant?
76.
Sterling Corporation has borrowed $75,000 that must be repaid in two years. This $75,000
is to be invested in an eight-year project with an estimated annual net cash flow of
$15,000. The payback period for this investment is:
77.
The management of Trylon Farms is considering the purchase of equipment costing
$320,000. The equipment has a useful life of eight years, with $20,000 residual value. The
use of this equipment will produce positive annual cash flow of $60,000 for eight years, as
well as $20,000 from sale of the equipment at the end of the eighth year. Compute the net
present value of this investment, discounted at an annual rate of 10%. (Present value of $1
due in eight years, discounted at 10%, is 0.467; present value of $1 received annually for
eight years, discounted at 10%, is 5.335.)
The management of Ortega Manufacturing has three different proposals under
consideration. The Accounting Department has prepared the following information:
*Management’s required rate of return is 15%.
78.
Refer to the information above. Which of the above proposals generates the greatest
annual cash flow?
79.
Refer to the information above. The above data indicate that:
80.
Refer to the information above. On the basis of the above data, which of the following is
false
?
81.
Which of the following is
not
an important financial consideration in capital budgeting?
82.
When using the net present value method for evaluating an investment, an increase in the
required rate of return will:
83.
An investment’s annual net cash flow will always be equal to its:
84.
Capital budgeting proposals often require input from all of the following stakeholders
except
: